29 January 2013

Bloomberg: Spain budget goal relaxation signalled possible by Rehn

European Union budget enforcer Olli Rehn signalled he might seek to ease Spain's targets for cutting its budget deficit next month, in a retreat from the austerity-first policy demands driving the economy into recession.

EU officials will make a decision on the best pace for Spain’s budget consolidation process when they deliver a scheduled assessment of the programme in February, Rehn said. “If there has been a serious deterioration in the economy, we can propose an extension of a country’s adjustment path. That’s what we did last year in the case of Spain.”

Spain’s economic contraction accelerated in the final three months of last year as the austerity programme dictated by European officials bit into domestic demand and destroyed 850,000 jobs during Prime Minister Mariano Rajoy’s first year in office. That programme will need to be intensified if Spain is to meet its target for this year. The government probably missed its goal of lowering the budget gap to 6.3 per cent of gross domestic product in 2012, Budget Minister Cristobal Montoro signalled last month. This year’s target is 4.5 per cent. GDP probably fell 0.6 per cent in the fourth quarter, twice the pace of contraction in the previous three months.  

“It is important that there is an appropriate and growth-friendly mix of expenditure cuts and tax increases”, Rehn said. He said he couldn’t confirm the 2012 budget gap exceeded 7 per cent, and said the EU will update its assessment on February 22.

Rajoy is seeking to avoid a full bailout as a slump in the euro area’s fourth-biggest economy enters its fifth year, undermining efforts to meet EU targets. The European Central Bank’s pledge to provide support to nations struggling has brought down borrowing costs, easing the pressure on Rajoy.

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